Is a mortgage a secured or unsecured loan?

A mortgage typically uses the property you are purchasing as collateral against the loan. In the worst-case scenario where you default on your mortgage, the lender may seize the property and sell it to reclaim its lost funds.

Interestingly, many homeowners may not realise the word ‘mortgage’ itself is a synonym for a secured loan. Your home is the asset offered to the bank or lender as collateral in exchange for the funds to purchase it (minus your deposit). 

What does it mean for a home loan to be secured?

When a lender offers you a loan, it will generally be one of two types: secured or unsecured. 

For a secured loan, you offer something of value to the lender as collateral. If you are unable to repay the loan, the lender can sell the collateral and recover the amount they are owed. For example, a home loan uses property as collateral, and a car loan may use your vehicle as collateral.

For an unsecured loan, you do not give any collateral to the lender. Credit cards and most personal loans are examples of unsecured loans. The lender assesses your creditworthiness, financial situation and ability to repay and offers a loan to you without security.

If you default on repaying an unsecured loan, the bank cannot take any of your assets to recover their money. However, due to the greater risk this poses to the lender, the interest rate and fees the lender charges may be higher than average. This is why it is often easier to get approval from lenders for secured loans compared to unsecured ones.  

When it comes to a home loan, this is arguably the greatest debt you will ever take on. The risk is too significant to offer a borrower an unsecured mortgage. If you were to default on your loan, you could owe a bank or lender hundreds of thousands of dollars (if not more), with no way of repaying this without the sale of a property.

Securing your mortgage against your property

After gaining loan approval and winning the bidding war for your property, you’ll be asked to sign a legal agreement with your lender that mentions your home as security for the loan. You are then legally declared the owner of the property and can occupy the house. However, the lender will hold onto the Certificate of Title until you repay the loan fully.  

Your land title records are kept by your local state or territory government registry. You will likely be charged a mortgage registration fee to lodge the land title or certificate outlining the ownership of the home. This registration process is important as it enables anyone planning to buy any property to check whether a lender has a claim over it. 

Note that your lender may require you to take home insurance to protect their interest by ensuring that the value of the asset secured is maintained

What happens if you can’t meet your mortgage repayments?

Sometimes life happens, and you may find yourself unable to meet your monthly mortgage repayments. While the lender may not start legal proceedings over a single late payment, if the problem persists, then they may send you a default notice.

You should try to make a payment within 30 days of receiving this notice, and ideally speak to your lender as soon as possible. You may be able to discuss options for a payment plan, or even hardship assistance – particularly if you are struggling with income issues due to a job loss, illness or disability, or death of a spouse or partner. There are policies in place designed to help borrowers keep their homes and not face default. 

Unfortunately, if you still do not meet your repayments, or you never respond to the lender's letters/emails/calls, your lender may initiate a legal process known as foreclosure to reclaim these funds, and engage a debt collection agency. This is where they may act to take possession of your house, sell it, and recover the amount they have loaned you. If the lender obtains a court order to repossess your home, then you will need to vacate so the lender can sell the house.

As you can see, the impact to your lender if you were to default on your home loan without any security can be severe. You may take some risk by offering your house as security, but by being able to sell the asset to reclaim lost funds, you avoid being in debt to a lender for a six-figure sum you cannot easily repay

This is why it’s important to stay on top of loan payments or reach out to your lender if you run into trouble. 

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